Article
Dynamic Equilibrium with Liquidity Constraints

Authors: Detemple J.; Serrat A.

Source: Review of Financial Studies, Volume 16, Number 2, 2003 , pp. 597-629(33)

Publisher: Oxford University Press

Abstract:

This article studies an intertemporal economy with liquidity constrained and unconstrained individuals. We use a stopping time approach to solve the finite horizonconstrained consumption portfolio problem with constant relative risk aversion and to examine the structure of equilibrium. The impact of the constraint on the optimal consumption and the financing portfolio is assessed. The equilibrium state price density is related to the exercise boundary of an American-style contingent claim with nonlinear payoff. This stopping time characterization enables us to prove the existence of an equilibrium and can be implemented numerically. Properties of equilibrium bond and stock returns are examined.

Document Type: Original article

Affiliations: Boston University and CIRANO JPMorgan

Publication date: 2003-01-01

• The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.

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• In this Subject: Economics ,  Finance
• By this author: Detemple J. ;  Serrat A.

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